Using Put/Call Ratios to Catch Bears 01-07-2011

Cusick's Corner
The market bounced off the lows and the bulls staged a comeback. I have been monitoring the market using Put/Call ratios to see if any current trend is potentially threatened. Today, the market Put/Call ratio hit the lows of .61, exhibiting a ton of bullishness, but finished the day right below its highs of .93. The ratio closing above .85 puts me on watch for potential bears or sellers who can put more pressure on the market. Confirmation will come from the price action and at this time the momentum is still bullish but indicating (take a look at the MACD) that we may be resigned to dealing with a choppy market that shows no conviction either way. Here's a fun exercise to do over the weekend -- take your favorite index ETF, i.e. SPY, and call it up in the oX Quote Detail. Then take a look at the top ten holdings in this ETF and check who the laggards are. This exercise can help you determine if this index is hitting some potential resistance or has good relative strength. Construction Data is due out Monday at 10am ET which could add some volatility right at the start of the week. See you Midday and have a good weekend.

Stocks finished broadly lower, but stock market averages finished well off session lows Friday. Economic data was in focus early after the Labor Department reported that that US economy added 103,000 jobs in December. Economists were looking for an increase of 150,000. On a positive note, November numbers were revised up (to 71,000 from 39,000) and the rate of unemployed fell to 9.4 percent from 9.8 percent. Economists were looking for a decline to 9.7 percent. Trading was steady on the heels of the data, but volatility picked up through midday. The European Debt Crisis is causing some concern, as yields rose on Portuguese debt Friday and the euro made a run back below 1.29 against the buck. Yet, a sell-off on Wall Street never materialized and instead, the Dow Jones Industrial Average battled off session lows in the second half of trading. The Dow hit a low of 11,600 and finished down 22 points to 11,675. The NASDAQ lost 6.7 points.

Bullish Flow
Finish Line (FINL) had a strong finish Friday. After falling to $15.91 early, shares of the retailer moved up late in the session and closed the day up 47 cents to $16.50. No news on the stock, but options action picked up as well. 5,640 calls and only 7 puts traded in the name, or 6X the recent average daily options volume. January 17.5 calls, which expire in two weeks, were the most actives and 4,269 contracts traded. February 17.5 and 20 calls were busy as well. In addition, according to data from Whatstrading.com, 92 percent of the total call volume in FINL traded at the ask, indicating that call buyers were dominating the action and looking for the stock to make a run higher in the weeks and months ahead.

Bullish order flow was also seen in AMR, Norfolk Southern (NSC), and Marvell Technology (MRVL).

Bearish Flow
Apollo Group (APOL) saw an uptick in put activity ahead of earnings. The for-profit education company is due to release results Monday after the closing bell. Shares settled the session Friday down $1.49 to $37.68 and the top trade was a block of 5,854 January 34 puts at 45 cents when the bid-ask was 40 to 44 cents. This appears to be an opening put buyer looking for a short-term hedge or making an outright bearish bet ahead of the earnings release. 15,000 puts and 8,375 calls traded in APOL today.

Bearish flow also picked up in Supervalu (SVU), Staples (SPLS), and Theravance (THRX).

Index Trading
The US Dollar Settled Currency Euro Index (.XDE) saw more volume than usual. This index tracks the EU/USD currency pair multiplied by 100 and finished Friday down .90 to 129.10. Meanwhile, in the options market, 1,390 puts and 110 calls traded on the ETF. Players were active in the January puts and the action seemed to include some bearish spread trades, which appear to be bets that the weakness in the euro will continue over the next couple of weeks. For example, the Jan 129 – 129.5 put spread traded at 23 cents and the January 126 – 127 put spread at 17 cents.

ETF Trading
Powershares QQQ (QQQQ) saw heavy trading Friday. The exchange-traded fund holds the same stocks as the NASDAQ 100 (.NDX), which is the top 100 non-financial stocks that trade on the NASDAQ Stock Market. The Qs finished the day down a nickel to $55.87 per share. 569,000 QQQQ puts and 163,000 QQQQ calls traded on the day. The action included 138,000 January 54 puts and 105,520 February 23 puts. Some investors were likely buying short-term out-of-the-money puts on the QQQQ to hedge their bets or to make outright bearish bets on the tech-heavy NASDAQ 100.